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Why the Dow's Historic 1,175-Point Plunge Isn't That Impressive

History was made on Wall Street this afternoon -- though it was the type of historical event that tempts investors to crawl into bed and pull the sheets over their heads.

When the closing bell sounded on Wall Street, the iconic Dow Jones Industrial Average(DJINDICES:^DJI) had tumbled 1,175.21 points, or 4.6%, to close at 24,345.75. The 1,175-point drop in the Dow marks the index's largest single-day point decline since its formation in 1896. It also follows Friday's 666-point loss, which had been the sixth-largest decline (now seventh) in the history of the Dow.

Image source: Getty Images.

What caused this historic shellacking of the Dow? While no single event can be pinpointed, it appears to be carryover from Apple's and Alphabet's disappointing earnings results and/or guidance late last week, as well as the growing fear of rapidly rising interest rates. Early indications from the Atlanta Federal Reserve are that the U.S. economy could grow by more than 5% in the first quarter, which could ignite inflation and require the Fed to get more aggressive with its monetary tightening (i.e., interest rate hikes).

Computer-driven selling, or essentially a flash-crash, may also be responsible for the cascade of red seen on Wall Street this afternoon.

Putting the Dow's historic tumble into perspective

However, the fact of the matter is that the Dow's historic plunge, even at its intraday peak of nearly 1,600 points, wasn't among the biggest Dow percentage moves of all time. In fact, it wasn't all that impressive if you take into account the complete history of the Dow.

Below is a table detailing the Dow's 20 largest single-day declines in terms of points and percentages.

What you'll note right off the bat is that many of the Dow's largest point declines aren't anywhere near its largest percentage losses of all time. In fact, though the Dow has endured 20 days of 500-point declines over its nearly 122-year history, just six of those days rank among its 20 largest percentage drops.

More importantly, we have to take into account the fact that the Dow has grown considerably over time. For example, today's point drop more than doubled the Black Monday crash in 1987 (1,175 versus 508), yet the percentage decline was only about a fifth as great (-4.6% versus -22.61%). The Dow has increased in value more than tenfold since 1987, so investors have to consider those gains when analyzing aggregate point moves in the index.

While it's a bit out of the ordinary, the Dow's 4.6% move lower is something Wall Street has witnessed dozens of times before and will see many more times in the future.

Smart investment moves to make right now

While investors' first instinct might be to panic upon reading headlines about the "record decline in the Dow," the smartest actions to consider taking right now are the three "Rs": relax, review, and reload.

Image source: Getty Images.

First of all, relax! Corrections are perfectly normal in the stock market. According to Yardeni Research, the S&P 500 has had 35 drops of at least 10% (when rounded to the nearest whole number) since 1950. That's about one every two years. Our last correction was about two years ago, so according to the averages, we're due.

Secondly, take this time to review your holdings. If your investment thesis on the stocks you own hasn't changed (i.e., if the reason you bought the companies you own still holds true), then you have no reason to worry or do anything rash like sell your holdings.

Lastly, consider reloading on existing positions or opening new positions if your investment thesis still holds water. Though corrections are commonplace, the stock market has proven to be one of the greatest long-term creators of wealth, with an average annual gain of 7% a year, including dividend reinvestment and accounting for inflation. Not to mention that some of the stock market's best days of all time tend to occur within a few weeks of its worst days. Because trying to time the market over the long run isn't possible, staying the course is your best path to long-term riches.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong